The Third Circuit Court of Appeals in Philadelphia has ruled that FTX must undergo an independent investigation by an examiner, overturning a previous decision by a Delaware bankruptcy judge.
The Third Circuit Court of Appeals in Philadelphia has ruled that FTX must undergo an independent investigation by an examiner, overturning a previous decision by a Delaware bankruptcy judge. The investigation, requested by the U.S. Trustee overseeing the FTX bankruptcy, aims to shed light on the crypto exchange's collapse and uncover potential fraudulent activities. The court found that the current probe led by FTX CEO John Ray III is insufficient and that an independent investigation is necessary to restore confidence in the crypto industry.
Judge Luis Felipe Restrepo emphasized the importance of an independent examiner who is not an interested party or involved with the debtor. Concerns were raised about the potential involvement of FTX employees who may have engaged in fraud and the conflict of interest presented by FTX's lawyers, Sullivan & Cromwell, who previously served as pre-petition advisors to the company.
The appointment of an examiner is mandated by the Bankruptcy Code when a debtor's debts exceed $5 million, which is certainly the case with FTX. Judge Restrepo also highlighted the broader implications of the investigation for the crypto industry.
"An investigation into FTX Group's use of its own cryptocurrency tokens, FTTs, to inflate the value of FTX and Alameda Research could bring this practice under further scrutiny, thereby alerting potential investors to undisclosed credit risks in other cryptocurrency companies," the opinion reads.
The decision to order an independent investigation comes after a year-long legal battle. In December 2022, the U.S. Trustee filed a motion to appoint an outside examiner, which was opposed by FTX CEO John Ray III. In February 2023, Judge John Dorsey denied the motion, citing the high cost of conducting two parallel investigations.
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